Two Approaches on Local Governments' Financial Sustainability: Law vs. Practice in Catalan Municipalities

Introduction

The recent global economic crisis had a major impact on the European Union (EU) member-states. As a response to the impact, austerity policies were imposed on many member-states, and especially the weaker ones, as for instance Greece, Italy, Spain, and Portugal (Magalhães, 2014). The crisis affected both the private and the public sector. Especially, the impact on the public sector was fundamental, and a lot of things had to change targeting to the development of defense mechanisms for the public sector entities (Di Mascio & Natalini, 2015). In the aftermath of the crisis the safeguarding of financial sustainability of local governments became a focal point for EU member-states (Rodriguez Bolívar, Galera, Muñoz, & Subires, 2014a).

In this context the EU developed in 2010-2011 directives known as the “Six Pack” concerning the strengthening of stability and budgetary surveillance, and later in 2013 the “Two Pack” with focus on financial stability and the “Fiscal Compact” followed. These regulation-packages had to be followed by the EU member-states, which correspondingly developed relevant national laws. It is argued that these EU-driven reforms changed the relation between the EU and the member-states as the rules became harder and were accompanied by sanctions, both in a preventive and corrective spirit (Schlosser, 2015). In this realm the Spanish government developed in 2012 the Organic Law 2/2012 (OL 2/2012) providing guidelines on budgetary stability and financial sustainability. The Catalan autonomous government was among the first to immediately develop a specific relevant law (Law 6/2012) applicable to the region (Almendral, 2013). As regards local administration, there were several legislative adaptations of OL 2/2012, as for instance Law 27/2013 on rationalization and sustainability for local administration approved in December 2013. Recently, the Catalan federation of municipalities (Federacio de Municipis de Catalunya [FMC], 2017) asked for the review and relaxation of the Law’s restrictive measures for the municipalities to enjoy more flexibility and independence in their decision-making and investment policies, since the targets set by legislation were sufficiently reached.

Scope of this chapter is to examine the concept of financial sustainability in Catalan municipalities through two different perspectives: the first refers to the perspective of law as it appears through the specific official guidelines provided by the relevant legislation (e.g. OL 2/2012, Law 27/2013).The second refers to the point of view of those who had to implement the law in practice; i.e. mayors and municipalities executives that are responsible for monitoring and ensuring financial sustainability. The chapter attempts to test the legal framework in contrast to their point of view, providing thus evidence on how government laws handle and how practitioners understand aspects of municipalities’ financial sustainability.

The Catalan municipalities comprise an interesting setting for this study. Traditionally, Catalonia is perceived to be a pioneer region of Spain –and the EU in general- in terms of financial reforms and as the driving force for the central government and the other regions (Almendral, 2013). In terms of financial sustainability, Catalonia is among the first Spanish regions to apply a specific law shortly after the introduction of OL 2/2012; therefore the Catalan regional and local governments appear to be particularly sensitive to the aspects of financial sustainability from the very beginning. Thus, by studying the Catalan case, useful lessons could turn out applicable to other regions as well. It is moreover interesting to study financial sustainability in the municipality level, as municipalities are closer to the people and provide a great load of services to the public (Rodriguez Bolivar, Galera, & Muñoz, 2014b). Maintaining this quality and consistency in service provision is the characteristic that defines financial sustainability in the public sector.